Does Instagram’s $1 billion sale explain the $41 million investment in Color?

Color infamously raised $41 million before releasing their mobile app in March of 2011 and has since become the punchline of countless jokes after a spectacularly failed launch. Their app was widely panned and they have since pivoted (most lately to a live video app) and have shaken up their management team. There is good reason to question such a large investment in what was just a team and an idea, particularly as the results have been quite questionable thusfar.

However, Instagram‘s success has proven what I suspect was the thesis of the Color investors. That thesis is that the shift to mobile would create an opportunity for new social networks to emerge, particularly around mobile digital photos. This opportunity was likely to be huge. Sequoia and the other investors were betting on entrepreneurs with a very strong track record of success who were pursuing an opportunity they strongly believed in. In fact, not all was lost for Sequoia who invested in the round that immediately preceded Instagram’s sale and doubled their money in a few days.

That said, I’m not sure the Instagram outcome justifies the investment in Color. If anything, I would argue that that large investment did Color more harm then good in a variety of ways:

It created unrealistic expectations from the press and the public about their app.

It allowed and encouraged the team to grow too quickly before there was a product to grow.

It did nothing to insulate the team from competition as Instagram and countless competitors emerged with much less capital behind them.

Instagram, by contrast, grew their team very slowly (only 13 people at time of acquisition) and only raised a modest $500k to start.

One wonders if investor pattern matching bias was to blame here. While there is much evidence that successful entrepreneurs have an advantage when starting a new company, perhaps over-relying on this technique isn’t useful. Also, Color was unique in that it was assembled as an all-star team of serial entrepreneurs who hadn’t all worked together before. Many would argue that a team that is experienced working well together has a better chance of success than a team of individual stars.